Boris and Kathy Forex Weekly 22/5/2017

The U.S. dollar came under heavy selling pressure this past week with the greenback breaking key support levels against the Japanese yen, euro, British pound and other currencies.

The best performer was the Swiss franc which soared over 2.8% versus the greenback and that was followed by the euro and yen. The New Zealand and Australian dollars lagged behind but still managed to rise nearly 1%.

US DOLLAR

Data Review

Empire Manufacturing -1.0 vs. 7.5 Expected

Housing Starts -2.6% vs. 3.7% Expected

Building Permits -2.5% vs. 0.2% Expected

Industrial Production 1.0% vs. 0.4% Expected

Manufacturing Production 1.0% vs. 0.4% Expected

JN GDP 0.5% vs. 0.5% Expected

Philadelphia Fed 38.8 vs. 18.5 Expected

Data Preview

Manufacturing/Services/Composite PMI’s and Existing Home Sales- Housing activity appears to be softer

FOMC Meeting Minutes- Minutes likely to be hawkish

Advance Goods Trade Balance- Potential for upside surprise given rise in new orders but lower export orders. USD also strong

Annualized GDP, Durable Goods Orders and U. of Mich. Report Revision- Revisions are difficult to predict but changes can be market moving

Key Levels - USD/JPY

Support 110.00

Resistance 112.00

Although softer economic reports played a key role in the dollar’s decline, President Trump’s political trouble is the real reason for its aggressive slide. The investigation into the ties between Trump’s presidential campaign and Russian influence sparked talk of impeachment. While this may be wishful thinking for some, the real implication will be on the President’s ability to push through his pro-growth policies and that’s where the political trade becomes an economic one.

The U.S. dollar ran up sharply mid-April to mid-May on the prospect of a June Federal Reserve rate hike but the central bank’s hawkish views rely on Trump following through with his tax cut and spending plans. If the optimism fades and doubt grows, the Fed may need forgo raising interest rates next month and that’s when the long dollar trade completely unwinds. We’re not saying that the Fed will stand pat next month, in fact they are quite hawkish but this is a serious risk for the dollar. Even if the Fed tightens next month, if they cast doubt about future moves, the dollar could suffer. Therefore when it comes to U.S. politics or economics – it’s really the same trade because the ongoing recovery in the economy and in turn future rate hikes hinge on pro-growth policies that are now at risk from Trump uncertainty. He could also “save” the dollar by going over Congress and pre-announcing policy plans – it's unprecedented but so are many of this President’s actions. The FOMC minutes, revisions to second quarter GDP, housing data and the trade balance are the main U.S. economic reports on the calendar next week. The minutes are likely to be hawkish along with comments from the 5 Federal Reserve Presidents so USD/JPY could rise above 112.

BRITISH POUND

Data Review

CPI 0.5% vs. 0.4% Expected

RPI 0.5% vs. 0.4% Expected

PPI Input 0.1% vs. 0.0% Expected

PPI Output 0.4% vs. 0.2% Expected

PPI Output Core 0.5% vs. 0.2% Expected

House Price Index 4.1% vs. 5.3% Expected

Claimant Count Rate 2.3% vs. 2.2% Prior

Jobless Claims Change 19.4k vs. 33.5k Prior

Avg. Weekly Earnings 2.4% vs. 2.4% Expected

ILO Unemployment Rate 4.6% vs. 4.7% Expected

Employment Change 122k vs. 21k Expected

Retail Sales 2.0% vs. 1.0% Expected

CBI Trends Total Orders 9 vs. 4 Expected

CBI Trends Selling Prices 23 vs. 29 Expected

Data Preview

CPI, RPI and PPI- Potential for upside surprise given that shop prices fell but at a more moderate pace. Prices up sharply according to PMIs

GDP Revisions- Revisions are not really expected but if changes are made they can be market moving

Key Levels - GBP/USD

Support 1.2900

Resistance 1.3100

As for sterling, GBP/USD has broken above 1.30, a psychologically and technical significant level. The break still needs to extend beyond 1.3050 to convince the bears that the next move will be 1.32. Although the Bank of England ruled out any rate hikes in the foreseeable future data has been very good, easing the market’s concerns. Consumer spending jumped 2.3% in the month of April, which was more than double the market’s 1.1% estimate. On an annualized basis, spending rose 4% which happened to be the strongest pace of growth in 5 months. Excluding autos and gas consumption was also very strong as the warm weather drew shoppers to the stores. Wages increased, inflation is on the rise and the number of people claiming jobless benefits was less in April than May. So while the BoE may not be ready to raise rates, their dovishness will gradually fade from the minds of investors if data continues to improve. There are no major U.K. economic reports scheduled for release next week outside of GDP revisions but U.K. GDP is generally not revised. Given the lack of U.K. data, a sharp fall in U.S. yields may be needed to take the pair back to 1.32.

EURO

Data Review

EZ Trade Balance 23.1b vs. 18.7b Expected

EZ GDP 0.5% vs. 0.5% Expected

GE ZEW Current Situation 83.9 vs. 82.0 Expected

EZ ZEW Economic Sentiment 35.1 vs. 26.3 Prior

GE ZEW Economic Sentiment 20.6 vs. 22 Expected

EZ GDP 0.5% vs. 0.5% Expected

EZ CPI 0.4% vs. 0.4% Expected

EZ CPI Core (YoY) 1.2% vs. 1.2% Expected

GE PPI 0.4% vs. 0.2% Expected

EZ Current Account 34.1b vs. 37.8b Prior

EZ Consumer Confidence -3.3 vs. -3.0 Expected

Data Preview

GE GDP Revisions- Revisions are difficult to predict but changes can be market moving

GE IFO Report- Potential for upside surprise given ZEW stronger but IP and factory orders down

GE and EZ PMI - Will have to see how IFO fares but ZEW stronger but IP and factory orders down

Key Levels - EUR/USD

Support 1.1000

Resistance 1.1300

The euro rose to its strongest level in 6 months on the back of U.S. dollar weakness. Although it pulled back slightly towards the end of the week, the breakout/uptrend remains intact as long as the currency pair holds above 1.10. It has been nearly 4 weeks since EUR/USD gapped up from 1.0730 to 1.0880 and the longer the pair holds above these levels, the more durable the gap. Fundamentals are also on the euro’s side as the political risk in France and Germany fade with the CDU party’s victory in rival territory. Data this past week has been good - German investor confidence rose strongly in the month of May, the Eurozone’s trade surplus hit a 3 month high and there were no revisions to the Eurozone’s Q1 GDP and French CPI reports. Even ECB President Draghi had to acknowledge the euro-area recovery as resilient and increasingly broad based. The euro also received help from the German – U.S. yield spread, which moved sharply higher next week. In the week ahead, the euro will remain in focus with the German IFO report and May PMIs due for release. Of all the major economies, the Eurozone is one of 2 with big events on the calendar so expect EUR/USD to be on the move. We are still looking for a firm break of 1.12 but if EUR/USD dips below 1.10, a deeper correction becomes likely.

AUD, NZD, CAD

Data Review

Australia

CH Retail Sales 10.7% vs. 10.8% Expected

CH Industrial Production 6.5% vs. 7.0% Expected

Employment Change 37.4k vs. 5.0k Expected

Unemployment Rate 5.7% vs. 5.9% Expected

Full Time Employment Change -11.6k vs. 73.9k Prior

Part Time Employment Change 49.0k vs. -13.9k Prior

New Zealand

PMI Services 52.8 vs. 58.8 Expected

Retail Sales Ex Inflation 1.5% vs. 0.9%

GDT Auction Prices Increase 3.2%

PPI Output 1.4% vs. 1.5% Prior

PPI Input 0.8% vs. 1.0% Expected

Canada

Existing Home Sales 1.7% vs. 1.1% Prior

Retail Sales 0.7% vs. 0.3% Expected

CPI 0.4% vs. 0.5% Expected

Data Preview

Australia

No Data

New Zealand

Trade Balance- Potential for downside surprise given lower manufacturing PMI index but dairy prices have been up

Canada

Bank of Canada Rate Decision- No changes in views expected

Key Levels

Support AUD .7350 NZD .6800 CAD 1.3500

Resistance AUD .7500 NZD .7000 CAD 1.3800

The commodity currencies also ended the week higher against the greenback. The Canadian dollar was the best performer while the New Zealand dollar lagged behind amidst mixed data. Dairy prices increased but less than the previous auction. Softer service sector activity was offset by stronger consumer spending. In Australia, Over 37K jobs were created in the month of April, which was lower than March but significantly better than expected. Full time job losses were limited and most importantly, the unemployment rate dropped to 5.7% from 5.9%. Although the Reserve Bank has expressed concern about labour activity their worries should be eased by this latest report. There are no major Australian economic reports scheduled for release next week but Reserve Bank of Australia Deputy Governor Debelle speaks a few times and New Zealand releases its trade balance report. The trend is still down for AUD and NZD especially if the U.S. dollar recovers.

USD/CAD came off its recent highs as oil recovered, leading many investors to believe that it peaked despite mixed Canadian data. Consumer prices increased but less than anticipated, causing the year over year rate to hold steady at 1.6%. Retail sales shot up in March but all of the increase was caused by auto sales because spending ex autos dropped -0.2%. There are 2 major events on Canada’s calendar – the Bank of Canada monetary policy announcement and the OPEC meeting. At the last meeting the central bank raised its growth forecast and brought forward their forecast for closing the output gap to the first half of 2018 sending the loonie sharply higher. Investors interpreted the announcement as the central moving away from their easing bias.

Since the last meeting there have been both improvements and deterioration in Canada’s economy. Retail sales, inflation, housing and trade activity softened but employment and manufacturing activity increased. We don’t think there’s enough changes to alter the central bank’s views and put the CAD recovery at risk. OPEC nations are widely expected to extend the production cuts that they agreed to earlier this year. There shouldn’t be a shock and awe announcement but a mere extension in production should still be enough to trigger a brief rally in oil and gains in the Canadian dollar.

The information provided here has been produced by third parties and does not reflect the opinion of Pepperstone. The information has been provided without any alteration or verification. Pepperstone does not represent that this material is accurate, current, or complete and it should not be relied upon as such. The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

Risk Warning: Leveraged trading in forex, derivatives, precious metals, CFDs or other off-exchange products on margin carries a high level of risk to your capital. You do not own, or have any rights to, the underlying assets. Trading is not suitable for everyone and may result in losses greater than your deposits. You should only trade with money you can afford to lose. Past performance is no guarantee of future performance and tax laws may be subject to change. Pepperstone is not a financial advisor and all services are provided on an execution only basis. Please consider our Risk Disclosure Statement and legal documentation and ensure that you fully understand the risks involved in light of your personal circumstances before you decide whether to acquire our services. We encourage you to seek independent advice if necessary.